Can Tata Steel Europe turn financially self sustainable?

Tata Steel Europe (TSE), which has been struggling with losses for the last decade, is now closer than ever to turning financially self-sustainable and surviving without the help from its Indian parent Tata Steel. The European subsidiary has benefitted by ₹1,688 crore because of the transformation initiatives executed in the last financial year. The transformation initiatives included focus on higher-value steels, optimisation of production processes using big data and advanced analytics, lowering of employment costs, and reduction of procurement costs.

With the initiatives and the robust demand, TSE has been able to close its earnings margins gap with the Indian business in January-March quarter. The earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne of steel of European business has shot up nearly four times to ₹18,135 in January-March quarter of 2022, compared to the same period in FY21. The EBITDA per tonne for Indian business was ₹23,690 in Q4 FY22.

TSE had EBITDA per tonne of ₹13,642 in Q3 FY22 and ₹4,841 in Q4 FY21. The India business had ₹28,631 EBITDA per tonne in Q3 FY22 and ₹26,054 in Q4 FY21. TSE posted an EBITDA of ₹4,349 crore in the fourth quarter, compared to ₹2,942 crore in the third quarter and ₹1,194 crore in the fourth quarter of FY21.

TV Narendran, Chief Executive Officer and Managing Director, Tata Steel says the European operations delivered robust performance as the transformation programme undertaken helped to leverage the strong business environment. "We have pursued several initiatives to de-risk the business, particularly across procurement and supply chain and continue to invest in technology and digitisation to drive productivity and improve our resilience," he said after the recent financial results.

The benefit of transformation programme from the U.K. business comes to ₹877 crore in the last financial year. The Netherlands business benefited ₹811 crore.

However, the demand imbalance in Europe is still a worry for the subsidiary. The automotive sector is recovering in the continent but continues to face shortages related to semiconductors. The ongoing Russia – Ukraine conflict has constrained traditional steel supply into Europe, leading to renewed supply – demand imbalances, the company said in its presentation.

Steel prices in western markets rose steeply in the January-March period on tight supply and recovering demand. Coking coal prices witnessed renewed volatility, with a steep rise being followed by a sharp decline. European power and energy costs to remain high due to ban on Russian coal imports. It will be moderated when renewable energy supply picks up.

The India business constitutes 62% of FY22 steel deliveries of Tata Steel at 18.27 million tonne, up 6% annually. Tata Steel closed the 2021-22 financial year with a record operating and financial performance, with EBIDTA being 2 times and profit being 5 times the previous year. The consolidated revenues stood at ₹2,43,959 crore and EBIDTA was ₹63,830 crore which works out to a margin of 26% and EBITDA per tonne of ₹21,626. "The cash outflow for the capex was Rs 10,522 crore, which is well within our earlier guidance," said Koushik Chatterjee, Executive Director and Chief Financial Officer, Tata Steel.

Tata Steel has generated strong free cash flows of ₹27,185 crores for the year despite higher working capital, taxes, and capex. While the Indian business continued to perform strongly with EBITDA margin of 39%, the European business generated the highest ever EBITDA of £1,199 million (₹12,164 crore) for the financial year.

The steelmaker has repaid ₹15,232 crore loans during the year. With this the net debt came down to ₹51,049 crore. The net debt to EBIDTA has improved to 0.8 times from 5.91 times in March 2020. It had come down to 2.44 times in March 2021. The gross debt stood at ₹75,561 crore.